00:00:00] Hi, everyone. This is the how to lower your tax bill 
[00:00:10] podcast. I'm your host, Terrence Hutchins. I'm, a financial and tax advisor in the Dallas Fort worth area. And the goal of this podcast is to help you listeners get 
[00:00:20] educated on different tax strategies. That you can implement to improve your tax situation immediately? Each episode, we'll break down useful tax tips you can use to save 
[00:00:30] money no matter what your personal or business income situation. Because our motto is keep more of what you earn. So let's get into today's 
[00:00:40] episode. Okay, everyone. Welcome back to our episode five of how to lower your tax bill. I'm your host, Terrence Hutchins, and my job is to help you figure out how to 
[00:00:50] lower your tax bill so you can keep more of what you earn. today's topic is a big one. So we have two different things. We're going to go over depreciation and business credits. 
[00:01:00] Now I know depreciation might not sound exciting, but trust me, When it comes to you saving money on your tax return, depreciation is really what you want to know about 
[00:01:10] and it's going to help you keep more of your hard earned money in your pocket. And at the end, I'm actually going to talk to you about a bodybuilder who deducted baby oil on his taxes. So what is 
[00:01:20] depreciation? Depreciation is in simple terms, a tax deduction for the wear and tear of stuff you use in your business. Whether it's machinery, office equipment, or even rental 
[00:01:30] properties. Now the fun part is depreciation is a non cash expense, which means you don't actually have to spend money to get the deduction. For example, let's say you 
[00:01:40] buy a $10,000 machine for your business and you decide to finance 100 percent of it. We're in December And if I bought the $10,000 machine, I can actually use it on my tax return this year. 
[00:01:50] Even if I didn't make a payment until 2025. And so even if I don't spend money out of pocket or if I don't spend the full $10,000, I can still take a deduction for the 
[00:02:00] $10,000 in the year that I quote unquote placed it in service, which means I made it available to be used in my business. Now what I always encourage people is, you only buy 
[00:02:10] stuff that's going to help you save money, save you time, or help you make money. So even if it's going to help you save in taxes, that alone may not be the best use of your 
[00:02:20] capital if the future use of it doesn't help you save time or help you make money down the road. But, when it comes to tax strategies, a lot of them will 
[00:02:30] center around how you decide to use your capital. depreciation So when it comes to the depreciation, there's really three methods you have. You have what's called MAKERS, which is the 
[00:02:40] Modified Accelerated Cost Recovery System. Alright, which is just tax jargon or accounting jargon. And this is probably the most common method. Simply, this just means 
[00:02:50] if I buy something and the IRS says, Hey, if you are going to use this longer than a year and it costs more than $2,500. So that's very important because if I buy a computer for 
[00:03:00] $2000. I don't have to depreciate that computer. I can just write it off in the first year without even treating it as an asset. But let's say I bought a computer that was 
[00:03:10] $5,000. Then all of a sudden I have to now decide, do I want to take that $5,000 up front? Or do I want to use it over the useful life of it, which the useful life, the IRS also 
[00:03:20] determines based on whatever piece of equipment that you have. So for example, a computer, the IRS says, hey, that's a five year property. Now you might only use your computer for three years or maybe use 
[00:03:30] it for 10. The IRS has their own rules. They're going to give you five. So if I buy a $5,000 computer, they say, Hey, you get a tax deduction for a $1000 per year. Now, I would like to 
[00:03:40] determine is that $1,000 deduction going to be more valuable to me today or is it going to be more valuable to me in the future? And if I feel like it's going to be more valuable in the future, I'm probably going to go ahead and 
[00:03:50] use MAKERS. I'm just going to spread out over five years knowing that I'm going to make more money down the road and the thousand dollars I deduct in years two, three, and four, I hopefully will be in a 
[00:04:00] higher tax bracket. And so the actual tax deduction will be larger if I wait. Now, most people. We're impatient. All right. And we don't like paying the IRS. And so we generally would like to take more of 
[00:04:10] our deductions upfront. So that's where section 179 or bonus depreciation come into play. Now section 179, that essentially just means you could deduct 
[00:04:20] up to a million two of your equipment, which is considered personal property, which is really non real estate related items or intangibles. 
[00:04:30] equipment, furniture, all that stuff. I can decide to deduct 100 percent of upfront with a cap of 1. 2 million per year. why that's important that if I exceed that 1. 2, 
[00:04:40] million I can't actually use it on my taxes that year. I have to carry it forward. So if I have a $1.4 million of deductions, the extra $200,000 is going to be carried 
[00:04:50] forward to the future years. Also, I can't use it to offset all of my income, I can only use it to offset 100 percent of what I made, which means I can't take a loss 
[00:05:00] if I decide to use 179. So, for example, if I make $100,000 and I have depreciation expenses of $110,000, I can only use 
[00:05:10] $100,000. The other $10,000 is also going to get carried forward. So, these are important things because, as I've looked at different tax returns, I see people leaving that extra depreciation. So 
[00:05:20] that's why if you meet a tax professional and they don't ask to look at your past years They're doing you a disservice because if You have stuff on there from the prior year that needs to be carried forward I 
[00:05:30] mean think about it if you went to the store and you had a store credit you'd like to make sure that that applied to your next purchase. You would hope that it wasn't just lost 
[00:05:40] and you essentially took money out of your own pocket So section 179 it'll probably become more popular as bonus depreciation It's starting to phase out. Back in 
[00:05:50] 2018, the IRS said, Hey, look, when it comes to items that have a less than 20 year shelf life, which is ovens, TVs, your electronics, your furniture, right, 
[00:06:00] they allowed you to deduct a hundred percent of it upfront. as each year has passed, they started to decrease the amount that you can deduct up front. So 2024, 
[00:06:10] bonus depreciation amount is 60%. So if I bought something for 100, 000, I can take a 60 percent deduction on it. Now, the reason people elected to take bonus appreciation 
[00:06:20] versus 179 is because there's no cap and it can actually create a loss for you and your business. So if you had that same $100,000 of income and you 
[00:06:30] had enough bonus depreciation to eclipse the $100,000, you could use 100 percent of it and it could wipe out your, income. Or I should say, it could wipe out the income 
[00:06:40] from your business. So if my business made $100,000 and I had $150,000 of depreciation, I could use the $50,000 loss against my other income. 
[00:06:50]Okay. So that's very important distinction there. That's going to be against my business income. section 179 will not allow me to deduct more than my business makes bonus 
[00:07:00] appreciation does allow me to do that. Now, one thing that has become more popular is cost segregation studies, and that's where you take a real 
[00:07:10] estate property and you actually break it out into four components. Two of those components, the land improvements and the personal property, you can actually bonus depreciate those and take 
[00:07:20] deductions on those and use that to create a loss on your tax return. That will allow you to reduce your overall income. We're going to get into that dynamic a little bit more in future episodes. But 
[00:07:30] many times when you see people bragging on social media about how, Hey, I made a million dollars and I didn't pay any taxes this year. Generally, it's because of that kind of concept, right.They invested some 
[00:07:40] money, whether they borrowed it or they took it out of their own investment accounts or their cash and they put it in something that gave them depreciation that allowed them to reduce 
[00:07:50] the other income that they made. So knowing about depreciation and planning it out strategically is very important because it ultimately is probably the biggest thing that will reduce your tax 
[00:08:00] bill on a large scale that I come across. And so it's important that you know, let me number one, not buy stuff just to get the tax deduction. Let me determine is it better to depreciate it up 
[00:08:10] front or is it better to wait to depreciate in the future and know that if I depreciate it up front, then the tax deduction is gone. So if I buy it and it's 30 grand, I decided to take 30 grand 
[00:08:20] up front. I'm not going to get a tax deduction on whatever I just bought in years two, three, four, and five. So even if I'm making a payment on it, that's just going to be an expense that's going to come out 
[00:08:30] of my cash. There's not going to be any tax benefit. So this is where a lot of business owners get in trouble when they don't manage their cash properly because they took the tax deduction up front and they're 
[00:08:40] still paying on something that's not giving them a tax benefit, but it's not reducing their profits. So, On Paper $30,000 of payments and you made $100,000. 
[00:08:50] Well, those $30,000 of payments would not reduce your income to $70000. It would only reduce your cash to $70,000, but you had to still pay taxes on a $100,000. So this is 
[00:09:00] why when it comes to taxes and business, it's important to work with someone who can kind of look at both so you're not focused on the tax impact. You can also be strategic with how it's going to impact you, not only 
[00:09:10] in year one, but also in future years. So hopefully that was helpful. Now we're going to transition over into business credits. And so a credit, as I kind of explained before, is 
[00:09:20] similar to if you go to the store and you have a gift card versus if you go to the store and you have a coupon. A tax deduction is going to reduce the cost of the item that you purchased based on the
[00:09:30] percentage. Normally that's going to be based on your tax bracket. So if I'm in a 35 percent tax bracket and I have a tax deduction, I'm going to save 35%. However, if I have a credit, I'm going to save dollar 
[00:09:40] for dollar. So if I have a thousand dollar credit, that's going to reduce my tax bill by a thousand dollars. Credits are better than deductions. So it's important to know what credits are available. 
[00:09:50] Here's a few of them that I come across most often. So I have a retirement plan, startup credits. There is the work opportunity tax credit. There's the disabled access 
[00:10:00] credit. There is the energy investment tax credit. There is the research and development credit. There is a low income housing tax credit. There is the employer provided 
[00:10:10] childcare facilities credit. There is the bio diesel and renewable diesel fuel credit. All right. So, so just to give you some highlights on a few of these, uh, now when it comes 
[00:10:20] to you as a business owner, the government wants to incentivize you to put money away for your employees for their retirement. So they give you three different types of credit. that they will allow 
[00:10:30] you to take if you have a retirement plan. And they generally will give it to you for the first 3 years that you have the plan open. they will actually give you a what's called a start up credit up to 
[00:10:40] $15,000. which is $5,000 annually for 3 years. So, Normally when I hire a company to operate my 401k, they're going to charge me something. So what this credit does, it 
[00:10:50] will actually cover half the cost of whatever it took to set up the plan. So the plan cost $5,000. This credit would cover $2,500 The other 
[00:11:00] $2,500 I can take as a tax deduction. Okay. There's also a contribution credit. So if I have employees that make under a hundred thousand dollars. I can actually get up 
[00:11:10] to $1,000 towards their employee match. And I can actually do that for up to five years. The first year it starts at a hundred percent and it basically decreases down up until year five, 
[00:11:20] where it's going to be at 25%. You also have an automatic enrollment credit. So this applies to new or existing retirement plans where you can add an 
[00:11:30] automatic enrollment, which just means. when your employee signs on for your company, however long it takes them to be eligible for the 401k, you basically tell them, Hey, we're going to 
[00:11:40] automatically sign up and you have to opt out of being in the plan. So if they opt out of the plan, you don't have to match them, but you still get to qualify for the credit. And that's 
[00:11:50] a $500 credit for the first three years. those are important to look at if you are a business owner to know, Hey, if I want to start a retirement plan, I need to make 
[00:12:00] sure that I let my tax professional know so I can get that extra credit and then I'll be able to deduct the difference on my tax return. You also have the research and development credit. 
[00:12:10] So as I've talked about before, The tax code is really written as an incentive code. And so they want to incentivize certain activities. So if I want to innovate 
[00:12:20] on a current idea or I want to create a new idea altogether, I can actually get a tax credit that applies to the wages, supplies, and some of the certain 
[00:12:30] costs that relate to me creating or improving a business component. So this is a credit that can completely offset the cost of what I just invested money in that 
[00:12:40] hopefully can eventually make me money down the road. A few other sort of less common credits are the work opportunity tax credit. So if you hire someone who's considered in a target 
[00:12:50] group many times this will be someone who's a veteran or it could be someone who had been incarcerated in the past. You're gonna tax credit for that. if you support 
[00:13:00] development and, renting to low income housing, like you develop an actual property, you can get credits towards that. You can also get credits towards creating 
[00:13:10] daycare for your employees. you can get a credit for some of the expenditures that you incur on the behalf of your staff. That could be a way to retain staff number one, but 
[00:13:20] also it gives you a tax credit to help spread some of the cost of hiring the people to do that. Then you have energy investments. So for example, if you own a building and you put money into like 
[00:13:30] solar panels or energy efficient windows stuff like that, you can get a credit. And then also if you remodeled your building to make it more disability 
[00:13:40] accessible you can actually get a credit towards paying some of those costs. And so with the credits that are available, you can actually, carry the credits forward up to 20 
[00:13:50] years. So most of those credits, they are considered non refundable credits, they only cover if you have a tax bill, but you can carry them forward up to 20 years. So that's 
[00:14:00] another reason why you want to make sure that if you have a tax professional, they're properly accounting for what you've done in the past. Or if you change tax professionals, they're looking at what you've done so they can properly 
[00:14:10] account for it in the current year and in future years.  So we've gone over depreciation. We've gone over tax credits. So hopefully you haven't gone to sleep yet. And if you've been 
[00:14:20] paying attention to the news, baby oil has been talked about a lot more this year. Okay. So you can go Google that if you want to get a little bit more context for that. But 
[00:14:30] back in the eighties it was relevant because there was actually a professional bodybuilder who claimed that his baby oil was a business expense. And he argued that it was essential for enhancing his muscle 
[00:14:40] definition during competition. Now, originally the IRS said, no, this is baby oil. We're not giving you a deduction for that. All right. However, the tax court decided that 
[00:14:50] his name was actually Heinz, like the ketchup. They decided that he could actually write it off because it was exclusively used for business as it relates to his competitions. And you know, the better he 
[00:15:00] did in the competition, the more money he made, which means the IRS would tax him more on it. And so the IRS isn't always correct. Sometimes they do overreach and sometimes you may have to actually go to court to do it. 
[00:15:10] So when you think about what can I deduct, I need to be able to justify my expense. But if I can prove that, hey, this expense helped me make more money, ultimately everybody wins because the more money you 
[00:15:20] make, the more money the IRS is going to take. Now that might not make you happy, but that makes them happy. But at least if I do spend money to make money, I can at least get a tax benefit from it. All right. So 
[00:15:30] hopefully you took some away from this episode. Be sure to leave us a review, like our episode, share it so we can start helping more people keep more of what they earn. And I'll talk to you guys next 
[00:15:40] week.